Back Taxes and Unfiled Tax Returns

As you know, IRS stands for Internal Revenue Service, with the emphasis on revenue. The IRS is charged with enforcing the U.S. Tax Code and collecting the taxes, penalties and interest assessed under that law. As you probably also know, the IRS takes its job very seriously. In 2015, federal income taxes generated well over 3 trillion dollars in revenue. The federal government relies on that money to keep the wheels of government turning.

That’s why falling behind on filing your taxes can be a frightening and stressful situation. You know that the IRS is not going to forget about your tax obligation. Eventually, the government will notice that you haven’t filed your tax returns and paid taxes and will begin to take steps to recover any taxes, interest and penalties that you owe. You want to bring your taxes up to date and avoid having IRS liens, garnishments and levies filed against you and your assets, but you just don’t know where to begin.

Luckily, there are things that can be done which will satisfy the IRS, bring you into tax compliance, and make you current with the taxes you owe per the IRS. In this article, we’re going to look at eight things that you should know about your unfiled returns and the potential back taxes, penalties and interest that you may owe.

In general, the IRS wants a taxpayer to file the last six concurrent tax returns first in order to consider you up-to-date and in compliance. Therefore, depending on your specific situation, this is where to begin – prepare all of your unfiled tax returns for at least the last six years. Remember, there is no statute of limitations if you have not filed a return. That means, the IRS can assess you anytime that it chooses to do so.

In order to begin preparing these tax returns, you need to collect as many of your tax records for the years in question that you can. We’re talking about things like W-2s and 1099 forms that you received for money that you earned, mortgage interest that you paid, or dividends and interest that you received. Don’t worry about missing records at this point. Simply gather as many of the records as you can.

The next step is to obtain the IRS transcripts that will show what income, interest or dividend was paid to you and reported to the IRS. These transcripts are a complete listing of all the 1099s and W2 forms that were sent to you during the years in question. You can use the transcripts to fill-in any gaps that you may have in your own records.

Of course, your records and the IRS transcripts may not be a complete record of your income. So, you must be diligent to determine if any additional income exists that is not of record, and include that income on your tax returns. As for deductions, you really don’t have to keep track of them if you take the standard deduction. On the other hand, if you pay a lot of state income tax, interest on a home, property taxes and/or pay substantial medical expenses not covered by insurance, you will want to locate the records relating to these deductions as well, so that you can calculate whether you will pay less taxes by itemizing your deductions.

If you own your own business, then income and expenses for the years in question need to be established. This income can be determined by looking at all 1099s that were sent to the IRS and adding in any income that was not reported. Alternatively, you can look at your total bank deposits to get an estimate of your income. Once income has been established you can calculate your business expenses by looking at all of the checks you wrote for business expenses.

Once your income taxes for the years in question have been established, you should look at your current finances to see what portion of the potential tax liability can or cannot realistically be repaid to the government. Bringing your taxes current not only involves filing late returns, but it also may involve discussing various solutions, e.g., installment agreement or offer-in-compromise, with the IRS concerning your outstanding tax debt. Therefore, immediately after you have filed your back tax returns, you need to consider your current financial situation. Many times, the amount of back taxes that you owe cannot be repaid in a reasonable period of time, i.e., 7 or 8 years. If this is the case in your situation, you may be eligible for an offer in compromise, in which case the IRS may accept a lesser amount to settle your debt. Alternatively, you may be found to be in extreme financial hardship or uncollectible. If this occurs, the IRS will put your tax debt into forbearance. This means that the debt is essentially uncollectable at the current time.
In any event, if a review of your finances shows that you will be unable to satisfy your potential tax debt, you probably shouldn’t waste any more time trying to gather every piece of paper relating to your income for the years in question. No matter what, you’re going to owe more that you can afford to pay – with or without the supporting documentation. In this case, you should simply file returns that show your good faith estimate of gross income and concentrate on negotiating some type of settlement with the IRS.

The IRS only charges interest and penalties on taxes that are owed. If your employer has withheld the required taxes from your salary or wages for the years in question, it is possible that, along with any other deductions you have, you may not owe the government any money at all. In fact, the government may owe you money in the form of a refund for the taxes that were already withheld and paid over. This would only apply to the last three tax years as the IRS has a three year statute of limitations. In addition, any refunds that you are entitled to will be applied to a tax balance that is owed for other years where you didn’t file a return.

Once your unfiled returns are completed, they should be filed one at a time in different envelopes. If you have been in contact with a particular IRS Revenue Officer, then the returns should be filed directly with him or her. It will likely take the IRS several months to process the returns. You will know they have been processed when you begin to receive billing notices in the mail. This means that you are back in the system.

We consult on a broad range of California state and local tax issues, including franchise tax, income tax, property tax, sales and use tax, payroll tax, fuel tax, and business license tax matters, as well as California New Employee Credits and California Competes Credits.